Detailed extensively on ABC News earlier today, the owner of a Washington D.C. based small business called Back Alley Waffles tore apart Groupon publicly for a failed promotion that may have contributed to a decision to close the doors of the restaurant. Craig Nelson, the 52-year-old owner, made the decision to open up a restaurant that sold waffles, smoothies, coffee and chai tea in order to bring more people into his art gallery. Approximately two months ago, he went into a partnership with Groupon to run a buy-one-get-one free promotion on his waffles. During the purchase period, approximately 730 Groupons were sold and the coupon company collected over $7,000 from future customers of Back Alley Waffles. According to Nelson’s recollection of the contract, a minimum of fifty percent of the money collected was promised to him.
As people started redeeming the coupons at Back Alley Waffles after the promotional purchase period ended, Nelson fulfilled orders that totaled up to about a $2,600 value if he had sold the waffles separately. Groupon’s business model requires the business owner to pay for the cost of the promotion upfront and payment will be issued to the small business over an extended period in three lump sums according to Nelson’s account. By the time that Nelson had given away food that he valued at $2,600, he received a check in the mail for approximately $1063.
Regarding the promotion, Nelson stated “$2,600 worth of waffles is not much to $1.6 billion corporation like Groupon, but for someone trying to open a restaurant with no money is a huge overhang up front. It’s a bad model. I blame myself for getting into it. It’s a warning to any other small business that is trying to start up to stay clear of these guys.” Unfortunately, Nelson wasn’t able to continue running the restaurant and had to shut the doors prior to completing the entire Groupon promotion.
Nelson attributes the closure of the restaurant to Groupon’s inability to issue payment on an expedited basis, but he was aware of the contract terms when he signed the agreement. However, it’s oddly archaic that a technologically advanced Web company like Groupon doesn’t offer an option for electronic transfer and instead relies on paper checks to issue payments to small businesses. It does seem sensible that Groupon could hypothetically offer immediate electronic transfers once a week based off the amount of Groupons redeemed since the company keeps track of the coupons through unique barcodes.
In response to Nelson’s outspoken views on the coupon company, Groupon director of communications Julie Anne Mossler pointed out that Nelson was extremely clear on the terms of the agreement prior to the launch. In a statement, she said “Mr. Nelsen initially approached Groupon and our merchant advisors structured a deal to best encourage overspend and help his business grow. We also required Back Alley to cap the number of Groupons sold to ensure the feature was in the best interest of both consumers and the merchant.”
She continued “We scheduled his feature on his terms, on a date he selected, under a contract he reviewed and signed. According to our records, only 132 Groupons, or 18 percent sold, have been redeemed since Back Alley ran two months ago, and Mr. Nelsen has received 2/3 of his share of the revenue to date. We always hate to hear that a local business has decided to close, but the math does not point to Groupon as the cause.”
While Nelson is vehemently opposed to Groupon, his admitted financial struggles with the art gallery may have also contributed to the downfall of Back Alley Waffles. Mossler also pointed out that Nelson committed to similar deals with LivingSocial and ScoutMob, more potential contributors to the decision to close the doors of the small business. In addition, Nelson’s restaurant received a fair amount of negative reviews on Yelp prior to and during the promotion. Customers often cited slow wait times and extremely poor customer service as the main problems with the restaurant.
In a somewhat comic response, Nelson is inviting “Grouponistas” to come down to the gallery and pay $450 for a waffle. In addition to that extremely expensive breakfast, customers get to submit a photo to Nelson which he will convert into a 4-foot by 4-foot mosaic with materials purchased from Home Depot.